The good news for businesses is that the majority of commercial contracts will be unaffected by Brexit. It is however very important for businesses to review key contracts and think about how they could be affected.
It is easy to identify cross-border contracts as likely candidates for difficulties. As well as tariffs, businesses might find that movement of goods becomes more difficult because of time and cost of dealing with customs. Not only could a business find that a contract becomes unprofitable but timescales for delivery of goods could become unmanageable.
Other, less obvious contracts could be affected. Construction agreements could become difficult to perform where shortages of labour or goods arise. The care industry relies heavily on workers from the EU. Exchange rate fluctuations could affect the cost of materials.
Where a contract is identified as a potential source of difficulties after Brexit, close attention needs to be paid to the terms of the contract. English courts are renowned for their strict approach to contractual interpretation. In the absence of express contractual terms, adversely affected parties are unlikely to be able to obtain relief from economic hardship caused by a change in circumstances. For that reason, it is prudent to seek a variation of contracts to insert a so-called ‘Brexit clause’ into agreements to specifically cater for the obvious or unforeseen effects that Brexit might bring. The nature of that clause will vary from contract to contract. In some cases there might be a contractual right to vary the contract. In most cases, it will be a matter of negotiation. Certainly, going forward thought should always be given to the inclusion of a Brexit clause in new contracts.
In the absence of a Brexit clause, parties will need to have regard to the existing terms of their contract. A ‘force majeure’ clause is a common term of a contract, used to excuse parties from their obligations where difficult circumstances arise. Caution should be exercised however. A force majeure clause can normally only be applied to obligations that become impossible to perform as a result of unforeseen circumstances arising outside the fault of any party as opposed to obligations that become uneconomic to perform. Sometimes a contract might have a clause relieving parties from performance of obligations where material adverse events arise. Such a clause might be more useful for a party seeking to excuse itself from its obligations.
It should be noted that a review of key contracts should focus equally on the possibility that the other party to a contract could seek to excuse itself from its obligations. No doubt parties will use Brexit to renegotiate or terminate deals. Further, businesses need to identify key suppliers and customers, be aware of the impact that their insolvency could have and plan accordingly.
Other less obvious terms of contracts could prove problematic. Where the scope of a territory is defined as ‘the EU’, will it include the UK after Brexit? This will be open to interpretation. Many contracts specify that the courts of England and Wales have exclusive jurisdiction. It is likely to become less common that a company in an EU member state will agree to this. In any event, businesses in the UK need to be alert to how Brexit might affect the enforceability of judgements made in the UK against persons and companies in the EU. Enforcement will be subject to the national procedural law of the country in which the person against which the judgement has been made. With that in mind, consider what security might be appropriate against possible breach of contract.
Lastly, whilst the exercise of reviewing key contracts is being carried out, consider other potential consequences of Brexit. These could include collapse of the EU, other member states leaving, Scottish independence and a possible reversal of the Brexit process. Whilst it is impossible to foresee and cater for every possible scenario, any level of flexibility can be built into a contract and the level of flexibility required will depend on the circumstances and bargaining position of the parties.
If you require advice regarding commercial contracts in relation to Brexit, contact Farleys’ commercial solicitors on 0845 287 0939 or submit your enquiry through our online contact form.